Good morning everyone and welcome to the AudioCodes Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the floor will be open for questions after the presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Mr. Roger Chuchen, Investor Relations. You may begin, Roger.

Thank you, operator. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes business outlook, future economic performance, product introductions, plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters are forward-looking statements as the term is defined under U.S. Federal Securities Law. Forward-looking statements are subject to various risks and uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties and factors include, but are not limited to, the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets, in particular, shifts in supply and demand, market acceptance of new products and the demand for existing products; the impact of competitive products and pricing on AudioCodes and its customers, products and markets; timely product and technology development, upgrades and the ability to manage changes in market conditions as needed, possible need for additional financing, the ability to satisfy confidence in the company's loan agreements, possible disruptions from the pandemic on a business and results of operations. The effects of the current terrorists attacks by Hamas and the warrent hostilities between Israel and Hamas and Israel and Hezbollah as well as the possibility that this could develop into a broader regional conflict involving Israel with other parties may affect our operations and may limit our ability to produce and sell our solutions. Any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and other factors detailed in AudioCodes' filings with the U.S. Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.

Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our fourth call and full year 2023 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes. Niran will start off by presenting a financial overview of the call. I will then review the business highlights and summary for the call and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?

Thank you, Shabtai, and hello, everyone. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release this morning, we will post shortly on our Investor Relations website an earning supplemental deck. On today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call. We will be comparing our fourth quarter 2023 results to the prior quarter as we believe it provides a better gauge of our financial performance. Revenues for the fourth quarter were $63.6 million, an increase of 3.2% over the $61.6 million reported in the third quarter of the current year. Full year 2023 revenues were $244.4 million, a decrease of 11.2% over the $275.1 million reported in 2022. Services revenues for the fourth quarter were $30.9 million accounted for 48.6% of total revenues. On an annual basis, services revenues were $120.4 million, an increase of 8.7% over the $110.8 million reported in 2022. The amount of deferred revenues as of December 31, 2023 was $82.8 million compared to $77.8 million as of September 30, 2023. Revenues by geographical regions for the quarter were split as follows, North America 44%, EMEA 37%, Asia Pacific 14%, and Central and Latin America 5%. Our top 15 customers represented an aggregate of 61% of our revenues in the fourth quarter, of which 46% was attributed to our nine largest distributors. GAAP results are as follows. Gross margin for the quarter was 66.7% compared to 66.5% in Q3, 2023. Operating income for the fourth quarter was $7.2 million or 11.4% of revenues compared to $5.8 million or 9.4% of revenues in Q3, 2023. Full…

Thank you, Niran. We are pleased to cap up 2023 with a solid fourth quarter results and with healthy growth in the strategic areas of our business, namely UCaaS and customer experience. At the same time we have seen important accelerated development and nice rise in opportunities relating to conversational AI which grew more than 50% year-over-year and it's quickly becoming a new growth engine for success in the areas of Microsoft Teams and UCaaS. Altogether when we combine the progress in our operation in the UCaaS, customer experience and conversational AI segments, it is clear that our focus on the enterprise space where business reached a level of 90% of company revenues for the quarter in the full year starts to birthroot and drive continued business expansion in enterprise space going forward. With continued focus in 2023 on shifting our business model into subscription and recurring sales and the shift to higher margin cloud software solutions and services, we are making significant progress in our transformation to become a software and services company. As in previous years, services revenue evolved to contribute about 50% of our business. We have built throughout this past four years a profitable managed services business exiting 2023 with 50% growth year-over-year enriching a level of $48 million annual recurring revenues for our Live business. We expect continued Live business growth in 2024 which currently is planned to grow on the order of another 40%. As a result, we've made significant progress in our strategic initiative to increase our software and service revenue mix to nearly 70% in 2023 up from 60% in 2022. Shifting our focus in 2023 to AI-first voice-related software and application and more so for 2024, we're now adding a new strong leg in form of software-to-service solution in the Conversational…

Thank you very much. We will now be conducting our question-and-answer session. [Operator Instructions] Thank you. Your first question is coming from Ryan MacWilliams of Barclays. Ryan, your line is live.

Hey, guys. This is David Cawthon on for Ryan McWilliams. Thanks for taking the question. How does your pipeline visibility now compare to what it was in 3Q? Were there any green shoots that you could point to for improving demand trends leaving the quarter?

Ryan, this is Shabtai. I'm sorry. It was hard to hear. Can you please repeat the question?

It's just a question on your pipeline visibility, how that compares now to the end of 3Q at the last earnings call. And just if you were seeing any green shoots leaving the quarter?

Yes. Well, largely, I would say that there's no much difference, although I must point out that usually fourth quarter is the strongest quarter in the year. I think that in 2023, that phenomenon has kind of been emphasized because budgets were less used earlier in the year due to the slowdown and delay of projects. So I think we enjoyed a strong fourth quarter. I therefore expect that first quarter will be just like in many previous years, will be probably down like 2% or 3%. But all-in-all, the pipeline looks good. I didn't mention that, but we had a very high score of bookings done in 2023 compared to 2022. So all-in-all, we believe we're fully effective. I would also add one more point, which I've not mentioned in my introduction, that we do intend to add, in the first half of 2023 new software services additions, new cloud multi-tenant solutions for recording services in form of compliance recording and meeting space. And we believe that our live platform would become substantially more competitive. We do not see any close competitors though with such capabilities. All-in-all, we believe that pipeline and visibility for 2024 should be good.

Got it. Thank you. And then how did CCaaS demand fair in the quarter? And are you seeing an increase in the tension for buyers on Voice AI? Thanks.

Yes, definitely. Actually, we do see a rise in number of opportunities in the CCaaS space for our Voca-CIC product. We actually, as I've mentioned, we won two large deals, one that's close to a million, one that's above half a million in North America. We have a range of more opportunities coming up. Also, we plan on an Analyst Day in about a month from today, or six weeks from today, dedicated primarily to Voca-CIC. And obviously, we will present that at Enterprise Connect in March, so a lot of activity in the CX space.

Got it. Thanks, Shabtai. I'll go back in the queue.

Thank you very much. Our next question is coming from Greg Burns of Sidoti & Company. Greg, your line is live.

Morning. The growth rates from Microsoft have slowed a little bit from where they were maybe a year ago. Can you just talk about what's driving that? Is it mixed with Live gaining greater traction or is it macro? Because it seems like in the CX market, you're still posting solid growth there a little stronger than what you're seeing on the UCaaS side of the business? Thank you.

Right. Yes, I think your observation is correct. Well, I think that the moderated growth results partly, as we all know, from the slowdown in global economics. So projects have been pushed, et cetera. However, in our specific business in the space relates directly to the success of what we call Microsoft Teams Phone, which is the connection of the enterprises to the public network. Now, we believe that up to now, there was limited benefit from adding the phone functionality over other functionalities of Microsoft Teams, such as chat, presence, conferences, et cetera. We do believe that in 2003, we started to see the impact of the conversational AI on the use of Teams Phone. Right? We have seen, obviously, generative AI technology being put to work. Our solutions, including meeting insights, is making use of generative AI, which in order to provide benefit in the Microsoft phone space, you really need to have a phone, a Teams phone license. Similarly, the introduction of Microsoft of Copilot and Teams Premium, and you can see a lot of more applications. So once there will be new business voice applications that will provide value on top of the Teams phone license, we will start to see increase in our business. And we believe that we've already seen a chance for it at the end of 2023. And we believe that going forward with the -- I would say, emerging adoption of meeting insights, recording of meetings, Copilot, we will see definitely a rise. So we believe that's kind of a belly in 2023, but we should see and expect to see growth coming back in '24 and beyond.

Okay, so what are the penetration rates of voice licensing in the Teams environment now? Is it still less than 15% or 10%?

Yes, well, the last numbers that I remember being quote were that around July of '23, I believe the number that was quoted was about $17 million or $18 million PSTN breakouts. That's just, as I mentioned $17 million or 18 million. The runaway is obviously substantially larger, right? Microsoft 365 paid licenses are close to $400 million. Teams as a whole without the phone is nowadays quoted to be at least $18 million [ph]. So there's a huge, huge runway expected. So, again, when there will be more applications that thrive value on top of the Teams phone license, I think you'll see increase in number of seats using Teams phone.

Okay. And, Niran, the cash conversion for this year, do you expect it to be stronger than what has been the last two years?

Yes, you saw the operating cash flow at the fourth quarter, which was like close to $10 million and improved it from previous few quarters. And we believe the operating cash flow for 2024 will be better than in 2023.

Okay, great. Thank you.

Thank you very much. Your next question is coming from Ryan Koontz of Needham & Company. Ryan, your line is live.

Thanks for the question. And nice quarter on the margins, particularly there, really great to see that. I hope we could circle back to Contact Center and your CX there. You talk about a really nice inflection to 40% growth. Can we drill in there? And what's behind that? Is it product improvements? Is it focus on go-to-market? Is it some of your key partners seeing inflection on sales growth? Any of those would be helpful. And this quick follow-up, can you clarify what those wins were again? The audio was breaking up a little bit on the, I think, two CX wins you mentioned. Thank you.

Right. Thank you, Ryan. So on the CX space, as I've mentioned, there are two key activities, one which is supporting in deployment of voice networks. As, you know, the world of Contact Center is moving from on-prem to cloud. There's a need to basically shift from the old networks to new networks, which are global in nature, different architecture. So we are providing usually SBC gear and managed services and more components in order to enable the transition from on-prem to CX. The large growth in CCaaS -- in CX, I'm sorry, is related to participating in several such large deployments of large CX vendors. So take a leader in CX who now wins against an incumbent that's kind of legacy and less powerful. When you move from an old supplier architecture that's on-prem to a new cloud-based vendor, there's a whole huge network. You're talking about hundreds of locations around the world. And in order to achieve that with high quality, you know, high security and efficiency, our SBCs and managed services like CX come into play. So that explains the success we enjoy. And the trend of moving from on-prem to cloud continues, I believe that we will continue to win such projects. And so the two wins I've mentioned. So the first one is, you know, a very large university in the U.S. who used our Voca-CIC in our compliance recording to replace incumbent solution at that time. That specific transaction was close to a million in booking. Second one with a large manufacturer who, you know, one of the S&P 500 companies who, again, chose to use our Voca-CIC and replace an incumbent certified solution in the markets of Teams space.

All right, great. Thanks. That's somewhat helpful. I mean, I guess, on-prem cloud is not really a new trend to be going up for many years. So any commentary on why you're specifically seeing this inflection of growth for AudioCodes in terms of your efforts in that market, which has been humming along pretty healthy for years?

Yes, it's definitely a healthy market, and we actually seen expansion in that segment. Actually, we just discussed prospect for the first quarter of 2024. It seems that it continues. I believe that with probably with more maturity and reliability of Contact Center operation from the cloud that may become an incentive for end users to move. Also, I would add that usually we're talking about contracts that last several years. And usually when such a contract is becoming to an end, this is the time when transition from on-prem to cloud will occur. So that is an ongoing process. And as the world of CKS matures and becoming more successful, we believe that we'll see more projects like this.

Great. That's real helpful. Just a quick follow-up. You have talked about Zoom phone in a while. Any quick commentary on Zoom in terms of their progress and with their phone products and your selling opportunity? Are you seeing much traction with Live there?

Well, we do continue to work with Zoom. We had enjoyed fewer opportunities. But at this stage, I would not say that we believe Zoom will become a growth engine for us in the UCaaS space.

Fair. All right. I'll pass it on. Thank you.

Sure.

Thank you very much. Your next question is coming from Samad Samana from Jefferies. Samad, your line is live.

Hey, guys, this is Billy Fitzsimmons on for Samad. Maybe backing up and taking a higher level view here. Can you guys remind us what you're seeing on the macro front? How did things like lead times and close rates evolve over the course of 2023? And did they get better or worse in the fourth quarter? Any customer verticals looking particularly strong or weak at this point? And then I want to double click on what's kind of assumed on macro in terms of the 2024 guide?

Right. Actually, it's a great question for CEOs and CFOs. 2024 is still kind of foggy. We have not seen any dramatic change from the end of 2023. We've seen good pipeline as I've mentioned before. Q4 was strong. But it's the last quarter in a year, so that's kind of expected, so, no change. At this stage it's hard to make a call as to, you know, whether 2024 will be substantially better or better than 2023. But all you know, I think for us as a company, while we have put aside the whole issue of service providers, which has impacted our operations early 2023, we're glad to focus on contact center, which is growing conversational AI, which is very fast growing these days, other opportunities. And also, UCaaS, which again, we believe that conversational AI will contribute to the growth of our business, so all-in-all, we believe enterprise space will be good and no other indication at this stage.

Got it. And then it's probably still early, but on the strong conversational AI bookings demand, can you relay some of the initial feedback you're seeing and hearing from customers, any color on the initial wins? And how should we think about the materialization that offering on the revenue line going forward?

Right. So we do focus, again, I mean, we live in a world where on one end there are some very strong, big technology providers such as Microsoft, Google and AWS on one end, so lots of technology up there in the cloud. On the other end, you have every company, every successful enterprise company adopting fast AI to improve its operation productivity. So in the middle, you need solutions that will tunnel the AI gear to those end users. Usually that's done by applications such as, you know, you can take Copilot, you can take Salesforce, you can take other unknown Google application. But then there are specific implementation which require the combination of a lot of those technologies. So I'll give you an example. We have implemented a very important solution for an emergency service that needs to pick up calls in real time, record them, transcribe them, derive insights from them, and act upon, apply automation on top of it and display it and send alert [ph]. So you basically definitely hear about the new breed of applications that will be AI-first enabled, and which combine a lot of areas, including telephony, networking and cognitive services. And this is where we shine when we bring a combination of all of these technologies that we have developed around the years, right? There's another, you know, these days with hostility everywhere in the world, does the need -- increased need to understand what's being said, where, for what purpose, and act upon it. That is a rising application in many areas. And that is something that has budgets for. So those are the type of solutions that we see currently.

Perfect. Thanks, guys.

Thank you very much. We appear to have reached the end of our question-and-answer session. I will now hand back over to Shabtai for any closing comments.

Thank you, operator. I would like to thank everyone who attended our conference call today on the years of recovery in our business in the second half of 2023. We've high confidence in our ability to successfully expand our business in 2024 and following years. We look forward to your participation in our next conference call. Thank you very much. Have a nice day. Goodbye.

Thank you very much, everyone. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.